Director-Led Shareholder Engagement Is Normal - Q&A

We summarize our review of this trend and relevant secondary sources in our Overview article, and the below Q&A.

1. How common is board-level engagement with shareholders?

Answer: Board engagement with shareholders has grown markedly over the past 5 to 10 years, and is a norm among established public companies (e.g., revenue >$1b). Directors engaging in such outreach have overwhelmingly reported positive results.

Relevant Resources and Excerpts

Vanguard’s Approach to Board Responsiveness (2023):

“More and more directors—often in conjunction with company leaders—are receiving input through engagement with shareholders. This may be, among other things, routine direct dialogue with a subset of stockholders, outreach either in preparation for or response to matters of concern, or engagement with proponents of a shareholder proposal.” (p. 1)

How Does Board-Shareholder Engagement Really Work? Evidence from a Survey of Corporate Officers and from Disclosure Data (2023, forthcoming in “Board-Shareholder Dialogue: Policy Debate, Legal Constrains, and Best Practices”):

“Our findings show that, while not ubiquitous, corporate-shareholder engagement is important and on the rise. Even though large-sized companies are more frequently engaged by institutional investors, board-shareholder engagement is extending to mid-sized companies as well…” (p. 4-5)

When discussing board-involved engagements:

“Less than a third of companies with revenue between $1 billion and $10 billion indicated zero [board] initiated engagements. 21.6% of respondents with annual revenue of $10 billion to less than $50 billion, and 18.2% of the largest companies by revenue, indicated the same.” (p. 13)

PwC’s 2022 Annual Corporate Directors Survey (polling a “cross-section of companies from over a dozen industries, 72% of which have annual revenues of more than $1 billion”):

“60% of directors say a member of their board other than their CEO met with shareholders during the year. Nearly 90% say it was productive.” (p. 4)

“The once-unusual practice of having non-executive directors meet with investors is now the norm. While just 42% of directors reported this practice in 2017, in 2022, 60% of directors say that a member of their board (other than the CEO) had direct engagement with shareholders in the past 12 months. This represents almost a 50% increase in prevalence compared to five years ago.” (p. 23)

“A large percentage of directors (42%) also tell us that their boards don’t think direct discussions between investors and directors are appropriate. With shareholder engagement becoming more and more expected, these directors may find themselves out of step with current trends and expectations.” (p. 23)

“Another nearly one in five (19%) say management prefers that directors not have a role in shareholder engagement. For directors on those boards, it may be time for a deeper discussion on the topic. If shareholder requests to meet with a director are rebuffed, this could be seen as a red flag, indicating either a lack of trust between management and the board, a lack of critical knowledge among board leadership, or other issues that would call for some skepticism about the board’s involvement and oversight.” (p. 24)

2. How frequent are those board-level shareholder engagements?

Answer: Companies with revenue above $1 billion report directors engaging with shareholders over 5 times in the past 12 months.

Relevant Resources and Excerpts

How Does Board-Shareholder Engagement Really Work? Evidence from a Survey of Corporate Officers and from Disclosure Data (2023, forthcoming in “Board-Shareholder Dialogue: Policy Debate, Legal Constrains, and Best Practices”):

“Around 40% of survey respondents with annual revenue in the $1-10 billion bracket report they engaged between 2 and 5 times [in the past 12 months], while larger companies report even more frequency. Nearly 9% of companies in the S&P 500 sample reported more than 12 episodes in the previous 12 months.” (p. 7)

3. Who from the Company is involved in these engagements?

Answer: For companies of sufficient size, it is normal and expected for the lead independent director to lead these engagements, with the chair of the compensation committee joining for executive compensation related matters.

Relevant Resources and Excerpts

How Does Board-Shareholder Engagement Really Work? Evidence from a Survey of Corporate Officers and from Disclosure Data (2023, forthcoming in “Board-Shareholder Dialogue: Policy Debate, Legal Constrains, and Best Practices”):

“The most frequently involved board member for all company sizes was the lead independent director (LID), who is generally present at least eight of 10 times. In fact, the LID is the most recurring leader of the engagement process: as Figure 12 shows, of the 216 companies in the S&P 500 index that disclosed their directors’ involvement in the engagement process, 31% stated that engagement was led by the LID, while only 18.1% stated the leader was the CEO.” (p. 22)

Public Company Guide - Planning Shareholder Engagement (2021, the Harvard Law Corporate Governance Forum):

“Some issues, like executive compensation, will mandate the involvement of the board, typically an independent board chair or lead director, or the chair of the compensation committee. In fact, shareholders will often decline meetings to discuss executive compensation issues if the chief executive participates, so the participation of relevant board members may be required.” (p. 4)

“While board members do not need to be involved in shareholder engagement, shareholders will often want to hear from a company’s board members and their participation may increase a shareholder’s willingness to engage (some institutional investors will desire board member participation, but some are explicit that it is not necessary or even seem to discourage it).” (p. 4)

Board-Shareholder Engagement Practices (2019, the Harvard Law Corporate Governance Forum):

"At large companies, across business sectors, the board most frequently delegates the leadership of the shareholder engagement process to the lead independent director, whereas in most of the smallest organizations the role is performed directly by either the CEO or the board chairman. Sixty percent or more of the largest companies involve their general counsel in board exchanges with investors.” (p. 3)

4. Who should be engaged by the Company?

Answer: Keeping in mind that not all shareholders may respond or take up the opportunity to engage, it is typical to contact the top institutional shareholders representing more than 50% of the outstanding shares. We recommend this outreach focus on shareholders that do not vote alongside ISS.

Relevant Resources and Excerpts

Public Company Guide - Planning Shareholder Engagement (2021, the Harvard Law Corporate Governance Forum):

“A company looking to establish an ongoing engagement program should reach out to shareholders holding a significant number of its outstanding shares (e.g., greater than 50%). For many companies this might consist of their top 25 institutional shareholders. Although the outreach may be broad, only a few shareholders may accept an invitation to engage each year, unless there are material performance or governance issues. Following an annual meeting at which there was significant shareholder opposition to the company’s proposals (or support for a shareholder proposal), a company can expect to see an increase in the number of shareholders accepting invitations to engage.” (p. 3)

“For most companies, institutional shareholders, including large index funds, own a significant portion of their outstanding shares. In 2017, the three largest global asset managers, Vanguard, BlackRock and State Street, combined held 20.5% and 16.5% of the shares in the S&P 500 and Russell 3000, respectively, and their ownership and related voting authority is projected to increase for the foreseeable future.” (p. 3)

5. On what subjects do directors engage with shareholders (i.e., is this duplicative of managements shareholder engagement)?

Answer: Board members are most typically involved in executive compensation and plan design discussions, along with other sustainability and governance related issues. This focus means that board-member engagement is a supplement to, not competitive with, management’s normal course shareholder outreach.

Relevant Resources and Excerpts

How Does Board-Shareholder Engagement Really Work? Evidence from a Survey of Corporate Officers and from Disclosure Data (2023, forthcoming in “Board-Shareholder Dialogue: Policy Debate, Legal Constrains, and Best Practices”):

“The most common topics of engagement are executive compensation, climate and greenhouse gas emissions and board diversity…” (p. 14)

“Under the category of executive compensation, the topic of incentive plan design issues (e.g., performance measures, targets, thresholds, maximum payouts) was most discussed across all indexes, sectors, and annual revenue.” (p. 14)

Board-Shareholder Engagement Practices (2019, the Harvard Law Corporate Governance Forum):

“…almost half of the survey participants in the financial services sector stated that their boards discuss with key investors the design of senior executive incentive plans (specifically, the choice performance measures, targets, thresholds and maximum payouts). While executive compensation is the most frequent topic of board-director engagement across segments of the survey population, the specific types of pay issues vary depending on the size of the companies—for smaller organizations, they are the weight of base salary and annual bonuses in the pay mix, whereas for their larger counterparts the discussion tends to be more in-depth and focus on the design and workings of incentive plans.” (p. 2)

The Director Shareholder Engagement Guidebook (2019, the Harvard Law Corporate Governance Forum):

“Isn’t this the job of management? Won’t directors talking directly to shareholders undercut my management team? Directors engage shareholders at a different level than management can. Shareholders aren’t out to undermine management or drive a wedge. In fact, directors engaging shareholders and demonstrating alignment and oversight can serve to reinforce management’s position.” (p. 7)

6. What are the benefits of director-led outreach?

Answer: Board-level engagement is a growing expectation among institutional investors, allows the board to socialize key issues with major shareholders, reinforces management’s position by demonstrating board alignment and oversight, and allows the board to build personal capital with investors which can be deployed should a crisis occur.

Relevant Resources and Excerpts

Public Company Guide - Planning Shareholder Engagement (2021, the Harvard Law Corporate Governance Forum):

“A company may have different motivations for shareholder engagement, but chief among them should be the desire to foster a good relationship with its key investors. […] Ongoing dialogue with shareholders can help companies understand the factors driving their voting decisions while also giving shareholders a better understanding of the company’s approach towards issues such as corporate governance, executive compensation and sustainability.” (p. 1)

The Director Shareholder Engagement Guidebook (2019, the Harvard Law Corporate Governance Forum):

The authors note the following benefits of director led outreach:

• “Socializes shareholders” [with company developments].

• “Showcase board expertise.”

• “Creates board self-awareness and increases understanding of expectations.”

• “Builds trust and personal capital.” (p. 5-6)

“We do have issues, but isn’t it better to let sleeping dogs lie? Companies who think they can avoid an issue by not talking about it or not discovering it are usually mistaken. If you have identified a tough question you are worried about answering, chances are your shareholders have as well. If a question or issue arises from meeting with a shareholder when would you prefer to deal with it? Before your circular is mailed so you can address and solve it, or after when the only option may be to vote against you? We are big believers that proactive crisis prevention is a much better approach than reactive crisis response.” (p. 7)

6. How should directors prepare and engage with shareholders?

Answer: Director engagement should take place during the off-season and participants should be thoroughly prepared and comfortable with the content to be discussed and the knowable expectations of the shareholders being engaged. This preparation may include trial-runs. The engagements should be arranged by the corporate secretary (or similar role) to take place by phone or videoconference. We would expect each conversation to last for roughly 30 minutes, followed by an internal debrief meeting to document the outcome of the call.

Relevant Resources and Excerpts

Public Company Guide - Planning Shareholder Engagement (2021, the Harvard Law Corporate Governance Forum):

“For most companies, the proxy off-season (typically between September and February) is the optimal time to engage with institutional shareholders.” (p. 2) “To prepare for each shareholder engagement, the engagement team should research the voting policies of the shareholder and the proxy advisory firms on the relevant issue.” (p. 4)

“Typical engagement meetings may last from 30 minutes to an hour and may be held telephonically, by video conference or in person. Companies should prepare a brief agenda for the meeting to help frame the discussion. After both parties introduce themselves, the person leading the meeting, which is usually the company’s senior-most executive present or board chair/lead director/committee chair, may provide a brief overview of the company’s operations or recent publicly disclosed financial performance. Following the overview, the company should address the key issue or issues that it wishes to discuss and provide a rationale for its decision-making. For example, if the purpose of the engagement meeting is to discuss executive compensation, the company should briefly provide an overview of its compensation plan’s structure, philosophy and link to performance or long-term strategy. “A company’s engagement team should use the meeting as an opportunity to explain the company’s programs and policies and solicit feedback for the board’s consideration. This is particularly important in an engagement meeting following a shareholder vote in which there was significant opposition to the company’s proposals or support for a shareholder proposal. If the company received a negative recommendation from a proxy advisory firm, it should avoid attacking the firm or its policies and instead focus on addressing any issues raised by the proxy advisory firm and explain the merits of the company’s policy or approach. The company should allot enough time for the shareholder to ask questions and present its own views on the relevant issue and other topics important to it. "Companies should also be prepared to talk about issues that may not be the primary focus of the engagement for the company but are engagement priorities for the shareholder. For example, a company that received low support for its most recent say-on-pay proposal should not only plan on discussing its executive compensation program, but other governance issues as well, even though they may not have been the subject of voting at the meeting. A shareholder may use the engagement to educate the company on its views on areas of interest to better understand the company’s approach to them.” (p. 5)

“Following each shareholder engagement meeting, the company’s engagement team should conduct a meeting debrief.” (p. 5)

The Director Shareholder Engagement Guidebook (2019, the Harvard Law Corporate Governance Forum)

“Send an invitation from the corporate secretary to top shareholders, acknowledging not all will take you up on your offer.” (p. 11)

“Engage ahead of proxy season when everyone is less busy, but more importantly before decisions have been solidified.” (p. 11)

“Make sure directors understand their roles vis-à-vis management and have been briefed on the unique details of the shareholder they are meeting.” (p. 11) “Prepare and practice for the meeting, including having a clear narrative for the company’s strategy.” (p. 11)

7. Is there a risk of disclosing material non-public information?

Answer: While Regulation FD prohibits the disclosure of material non-public information, the risk of such disclosure is low so long as directors prepare an agenda in advance and participants are prepared so as to keep all discussions high level and focused on executive compensation and governance issues.

Relevant Resources and Excerpts

Public Company Guide - Planning Shareholder Engagement (2021, the Harvard Law Corporate Governance Forum):

“When discussing Regulation FD: “The company’s engagement team should focus the conversation on topics such as corporate governance and executive compensation and should avoid discussions of undisclosed corporate strategy or forecasts of operational or financial performance. Most public companies will have already established communications policies to educate their senior executives and other personnel who communicate regularly with analysts and other members of the investment community. However, if board members or other participants who have not received Regulation FD training are involved in the engagement, the company or its legal counsel should provide them with the necessary training in advance.” (p. 6)

“The company would typically not have to file written materials used for engagement during the off-season with the SEC under Exchange Act Rule 14a‑6, which requires filing of written solicitation materials used to solicit proxies.” (p. 6)

The Director Shareholder Engagement Guidebook (2019, the Harvard Law Corporate Governance Forum):

“What if a director says something they shouldn’t or reveals inside information? The majority of shareholders aren’t out to get inside information from you, usually they want to give you their perspective and gain a deeper understanding. The best way to avoid this concern is to prepare directors properly for these meetings.” (p. 7)

8. What are ISS’ views on shareholder engagement?

Answer: ISS signals that director involvement is preferred in a few ways. First, ISS will review the compensation committee’s shareholder engagement and responsiveness to shareholders, including the degree of LID involvement in shareholder outreach, when say-on-pay receives support below 70%. In addition, ISS will support proposals to establish shareholder engagement mechanisms unless the lead independent director is made available to major shareholders for periodic consultation and direct communication.

Relevant Resources and Excerpts

ISS US Compensation Policies FAQ

"13. If a company receives low support for its say-on-pay proposal, how does ISS assess the board's actions taken in response? “When a say-on-pay proposal receives less than 70% support of votes cast (for and against), ISS will conduct a qualitative review of the compensation committee’s responsiveness to shareholder opposition at the next annual meeting. This review of a company's responsiveness will take into consideration the following: “The disclosure of details on the breadth of engagement, including information on the frequency and timing of engagements, the number of institutional investors, and the company participants (including whether independent directors participated); [….] “If the company has demonstrated poor responsiveness, ISS will generally recommend a vote against the say-on pay proposal and incumbent compensation committee members. ISS may limit the adverse recommendation to the say-on-pay proposal if the board has demonstrated a limited degree of responsiveness, but which falls short of a robust response. In cases of multiple years of insufficient responsiveness indicating a systemic problem around board stewardship and oversight, ISS may recommend against the full board…”

ISS Proxy Voting Guideline

“Shareholder Engagement Policy (Shareholder Advisory Committee) General Recommendation: Generally vote for shareholder proposals requesting that the board establish an internal mechanism/process, which may include a committee, in order to improve communications between directors and shareholders, unless the company has the following features, as appropriate: […] “The company has an independent chair or a lead director, according to ISS’ definition. This individual must be made available for periodic consultation and direct communication with major shareholders."